Financial Supervisory System in Korea

1. Financial Supervisory System in Korea Mr. Junghoon Hwang International Cooperation Department Financial Supervisory Service

2. Overview 1. History 2. Organization 3. Budget 4. Function

3. 1. History

4. Pre-Integration(~1999) MOFE Monetary Board BOK Securities Supervisory Board Insurance Supervisory Board Non-Bank Supervisory Authority Office of Bank Supervision Commercial Banks Specialized Banks Securities & Futures Companies Investment Trust Companies Insurance Companies Non-Bank Financial Institutions

5. Integration Background • Growing convergence of financial services • Blurring distinction among financial sectors • Increased importance of financial conglomerates • The Asian financial crisis of 1997-1998 • Growing need for a comprehensive supervision

6. Discussions • Presidential Committee on Financial Reform • Recommendation from the IMF

7. Integration in 1999 • 1997: The Act on Establishment of Financial Supervisory Organizations • 1998: Establishment of the Financial Supervisory Commission (now Financial Services Commission) • 1999: Establishment of the Financial Supervisory Service

8. After Integration (1999-2008) FSC (Financial Supervisory Commission) MOFE (Ministry of Finance & Economy) MPC (Monetary Policy Committee) BOK (Bank of Korea) FSS (Financial Supervisory Service) KDIC (Korea Deposit Insurance Corporation) Commercial Banks Specialized Banks Securities & Futures Companies Investment Trust Companies Insurance Companies Non-Bank Financial Institutions

9. Advantages • One-Stop Service • Total risk management • Concentration of information • Less room for regulatory arbitrage & supervisory blind spot • Synergy Effect

10. CASEs • Housing Bubble : LTV & DTI extended to all financial institutions • Information Concentration : prevent spill –over effect from an affiliate to the total group • Cross-selling : Bancassurance, Mutual Funds

11. Disadvantages • Imbalanced concentration of authority and responsibility • Regulatory conflict between prudential stability vs. conduct of business • Potential for biased supervision

12. Change in 2008 • The Financial Policy Bureau of the MOFE integrated into the Financial Supervisory Commission → The Financial Services Commission • Separation of the FSS Governor and the FSC Chairman

13. Current Structure (2008-) FSC (Financial Services Commission) MOSF (Ministry of Strategy & Finance) MPC (Monetary Policy Committee) FSS (Financial Supervisory Service) BOK (Bank of Korea) KDIC (Korea Deposit Insurance Corporation) Commercial Banks Specialized Banks Securities & Futures Companies Investment Trust Companies Insurance Companies Non-Bank Financial Institutions

14. 2. Organization

15. Current System Financial Services Commission Financial policies & Regulations Securities & Futures Commission Financial Supervisory Service Examination & Inspection Commercial Banks Specialized Banks Securities & Futures Companies Investment Trust Companies Insurance Companies Non-Bank Financial Institutions Other Financial Institutions

16. Korean Financial Markets Stock Market Bond Market FX Market • Suffered from external • risk factors (fell by 11% in • 2011) • Expect to see continued • fluctuation reflecting • external uncertainties • Foreign investment outflow caused drop in stock prices in 2011 • Foreign investors’ net purchase from Jan to Feb 2012 at KRW 10. 1 trillion • Interest rate down due to flight quality in 2011 • Upside and downside risks likely to coexist • Foreign net purchase in 2011(KRW 41.2 trillion) • U.S. and European funds turn to net investment (Jan-Feb 2012: KRW 2.1 trillion) • Strong won against dollar in early 2012 from foreign investment inflows • Strong won against yen from Japan’s trade deficit • Volatility of won/dollar exchange rates expected to increase due to continued global uncertainties

17. Korean Financial Industry Banks Financial Investment Companies Insurance Companies • 18 banks with total assets of KRW 1,994.5 trillion • BIS capital ratio : 14.13% • ROA : 0.94% (up by 0.4%p from end-2010) • NPL ratio : 1.1% • 62 financial investment companies with total assets of KRW 252.9 trillion • NI : up from FY10 • ROE : 11.0% (rising since 2008 crisis) • 23 life insurance companies with total assets of KRW 429.4 trillion in Sept. 2011 • - ROA : 0.3%p ↓(y-o-y) • 30 non-life insurance companies with total assets of KRW 116.5 trillion in Sept. 2011 • - ROA : 0.7%p ↑(y-o-y)

18. Subject Institutions (As of 2011) • Banks: 55 (including 37 branches of foreign banks) • Mutual Savings Banks: 105 (93 as of May 2012) • Credit-Specialized Finance Companies: 64 • Credit Unions: 962 • Financial Investment Companies: 62 • Asset Management Companies : 80 • Insurance Companies: 53 • Financial Holding Companies: 8

19. Financial Supervisory Service • Purpose : Inspection and examination of FIs • Non-capital special corporation • Executives - 1 Governor (appointed by the President of the ROK) - 4 Senior Deputy Governors (1 appointed by the FSC) or less - 8 Deputy Governors (appointed by the Governor) or less - 1 Auditor (appointed by the President of the ROK)

20. Financial Services Commission • Purpose : To perform duties concerning financial policies, supervision of the soundness of foreign exchange business management institutions and financial supervision • 9 commissioners (including Governor of FSS) • Term : 3 years (renewable once)

21. FSC Commissioners Vice Chairman MOSF Vice Minister FSS Governor BOK Deputy Governor KDIC President Chairman Industry Representative Standing Commissioner Standing Commissioner

22. Securities & Futures Commission • Purpose : - Market investigation(e.g. insider trading, price manipulation) - Accounting standards & audit reviews • 5 commissioners • Term : 3 years (renewable once)

23. SFC Commissioners Standing Commissioner Non-standing Commissioner Chairman (VC of FSC) Non-standing Commissioner Non-standing Commissioner

24. Related Organizations • Bank of Korea (BOK) • Bank notes and coins issuance • Monetary and credit policies • Central bank to commercial banks • Banker to the government • Joint bank examination & info sharing with the FSS • Korea Deposit Insurance Corporation (KDIC) • Small depositors (up to KRW50M, app. US$50,000) • Joint bank examination & info sharing with the FSS

25. Internal & External Control • Financial Services Commission - Approval of Budget & Closing • Guidance & supervision for the FSS • National Assembly - Annual inspections • Internal Audit Office - Daily operation monitoring

26. Organization Chart Chief Executive Auditor Governor Internal Audit Office Internal Inspection Office 1st Senior Deputy Governor Senior Deputy Governor Senior Deputy Governor Planning & Management Insurance Banking & Non-banking Examination Consumer Protection Banking & Non-banking Supervision Accounting Financial Investment Supervision Financial Investment Examination Insurance Supervision Department Planning & Coordination Department Bank Examination Department 1 Bank Supervision Department Consumer Protection Department Financial Investment Supervision Department Accounting Supervision Department 1 Financial Investment Examination Department General Affairs Department Insurance Investigation Department Bank Examination Department 2 Foreign Exchange Supervision Department Financial Education Department Accounting Supervision Department 2 Derivatives, Trust, Structured Products and Pension Department Capital Market Investigation Department 1 Public Affairs Office Life Insurance Examination Department Mutual Savings Bank Supervision Department Corporate Credit Department Dispute Settlement Department Capital Market Investigation Department 2 Supervision Coordination Department Non-life Insurance Examination Department Corporate Disclosure Department Cooperative Finance & Loan Business Supervision Department Mutual Savings Bank Examination Department 1 International Cooperation Department Financial Service Improvement Department Mutual Savings Bank Examination Department 2 Macro-prudential Supervision Department Micro-credit Support Department IT Supervision Department Enforcement Review Office Cooperative Finance & Loan Business Examination Department Financial Hub Korea

27. Regional & Overseas Offices Chuncheon Seoul • 4 regional and 3 district offices • 8 overseas representative offices • 1,600 staff members Daejeon Daegu Jeonju Busan Gwangju Jeju

28. 3. Budget

29. Accounting • Same fiscal year of the government • FSS Budget must be approved by the FSC • The budget plan must be submitted 60 days prior to the commencement of fiscal year • The balance sheet of the settlement of accounts must be submitted within 2 months after the closing of the fiscal year

30. Revenue • Supervisory fees from financial institutions • Fees for registration of securities issuers • Contributions from the Bank of Korea • Contributions from the government, etc.

31. Revenue (2011) • Total budget : KRW 263.2 billion - Registration fee(61.3 B) - Contribution by the BOK(10.0 B) - Interest earnings & etc.(5.2 B) = Supervisory fee(186.7 B) (+10.2%, yoy)

32. Supervisory fees • Draw up the total budget (by FSC) • Calculate the amount for supervisory fees • = Total budget – (fees for registration of securities issuers + contribution by the BOK + interest income and others) • Allocate supervisory fees for each industry • Calculated based on (1) injected manpower from the FSS(60%) and (2)operating revenues(40%) • Allocate supervisory fees for each financial institution • Calculated based on the allotment ratio for each industry

33. Supervisory fees (2011) • Supervisory fees for each industry • Total : KRW 186.7 bil • Banks & Non-Banks : 115.4 bil • Financial Investment : 35.5 bil • Insurance : 35.8 bil • Supervisory fees for each company • Banks & Non-Banks : 0.00525702% x Total Liabilities • Investment Companies : 0.01420594% x Total Liabilities, 0.02292019% x Operating Revenues • Insurance : 0.00627508% x Total Liabilities, 0.00799453% x Premium

34. 4. Function

35. Supervision of Financial Institutions • Examination of Financial Institutions • Capital Market Supervision • Consumer Protection

36. Supervision • Entry Regulations • Prudential Regulations • Management Evaluation • Prompt Corrective Actions

37. Examination Process • Off-site Surveillance • Examination Planning • Pre-Examination Preparations • On-Site Examination • Debriefing • Post-Examination Actions

38. Capital Market Supervision • Corporate Disclosure (DART) • Regulations on Audit & Accounting • Regulations on Unfair Trading

39. Consumer Protection • Financial Disputes Mediation • Process Consumer Complaints • Improvement of Regulations • Consumer Education

40. Summary • The FSS is Korea’s first consolidated financial supervisory authority. • The FSS consists of 36 departments and 1,600 staff members. • The FSS is mainly funded by supervisory fees from financial institutions. • The FSS deals with overall supervision of financial institutions as well as capital markets.

41. Thank you!junghoon.hwang@fss.or.kr